Nova Ltd

NASDAQ:NVMI

Earnings Call Transcript 2017-Q4

[Operator]

Good day and welcome to the Nova Measuring Instruments Ltd. Fourth Quarter 2017 Results Conference Call. Today's conference is being recorded.

At this time, I would now like to turn the conference over to Miri Segal, MS-IR. Please go ahead.

[Miri Segal, MS-IR]

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's fourth quarter and full year 2017 financial results conference call. With us on the line today are Mr. Eitan Oppenhaim, President and CEO and Mr. Dror David, CFO.

Before we begin, may I remind our listeners, that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statements outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it in the Investor Relations of the Company's Web site.

Eitan will begin the call with a business update, followed by Dror, with an overview of the financials. We will then open the call for the question-and-answer session.

I'll now hand over the call to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you, Miri. Let me add my welcome to everyone and thank you all for joining our fourth quarter and full year 2017 financial results conference call. I will start the call today by speaking briefly to December quarter results.

I'll then spend some time summarizing 2017 performance highlights and the relevance to our growth trajectory in the years to come. I will conclude my part with the guidance for the first quarter of 2018. Following my commentary, Dror will review the quarterly financial results in detail.

Our fourth quarter performance was an excellent conclusion to a fifth consecutive record year, demonstrating the strength of our diverse portfolio across all technology and device segment. Revenue and non-GAAP profitability was for the fourth quarter, both exceeded our quarterly guidance.

The new record level in the fourth quarter contributed to yearly revenue growth of 35%, where products alone grew at a pace of 42%, outperforming the market annual growth rate. This significant milestone is driven by growth in all our product lines product lines, platforms and technology.

Our consistent performance through 2017, which reflects compound annual growth of 18% in the last five years, has resonated with our customers as we've been able to meet their growing demand for advanced Metrology in a very challenging wafer fabrication environment. All of that is also reflected in the market share we gained this year with strength in the most complex applications, which are crucial to enable our customers fast and stable ramp up.

During the growth we continued to effectively execute against our strategic target to diversify our markets, customers and products with notable success in all key performance metrics. Our initiative to expand our presence in memory segment continued to bear fruit this quarter as well, with strong contribution from leading memory customers.

As reflected in our quarterly results, the memory segment accounted for 40% of the overall product revenue, a trend that will continue during 2018 while we make more significant inroads into the space driven by growing demand for vertical NAND and advanced Drones. This successful milestone was also supported by our recent press release about two major memory customers who selected our dimensional solution following all five competitive evaluations.

As a result our effort to create a balanced customer mix are progressing with three large customers exceeding each more than 10% of our quarterly product revenue, including two leading memory customers. Investing in disruptive technology continues to be our main focus as we believe that our ability to create an innovative and differentiated portfolio will expand our available market and contribute to our growth while we meet our customers' most difficult process challenges.

This initiative has been executed successfully with three new recently launched Metrology hardware models to enhance our dimensional and material Metrology portfolio in both the X-ray and optical product lines. All of our newly launched models, including new OCD stand-alone also OCD integrated Metrology and XPS tools have been already installed in various customers and are generating revenues.

On top of our new hardware models, we also recently launched a breakthrough machine learning software suite to compliment the traditional physical modeling software engine that has been used in the industry for many years. The new NOVAFit software significantly enhances our Metrology capabilities and accelerates time to solution in the most advanced 3D and High Aspect Radio devices.

Together with our big data fleet management infrastructure that has been well received by all leading customers, NOVAFit utilizes fleet-wide information to provide adaptive metrology solution based on continuous training. The platform is also open for various other technologies and various other high tech Metrology information to improve training and validation.

Moving now to the full year, 2017 turned out to be an outstanding year for NOVO with record financial performance, demonstrating a fifth consecutive year of growth and reflecting the confirmation we went through to establish NOVA as a multi-technology end product company. Our reflective offering is generating a lot of traction among our customers and as a result we posted annual record revenues in both our dimensional optical portfolio and our material X-ray portfolio.

Notably, as part of this achievement we could broadly leverage our new software capability to generate record annual software revenues, which more than doubled year-over-year. This achievement supports our long-term consistent vision of either coupling between hardware and advanced software engine to address complex challenges that are no longer related only to hardware performance.

With an outcome of our commitment to support our customers' most challenging front visions, we currently have more engagements and opportunities across all the industry segments and devices, which we believe will strengthen our competitive positions, expand our available markets and allow us to differentiate our offering. Because of these successful engagements our customer end segments mix in 2017 were more than rectified and balanced than never before.

A key part of our strategy for the last few years was to broaden our customer base by expanding our position in memory. In 2017 we made significant progress in achieving that by gaining memory market share with both our optical and X-ray solution. This remarkable progress is reflected in the yearly revenue mix, with more than 35% of our product revenue generated by memory customers. Moreover, we could expand our memory exposure even further this year by making significant inroads to all major memory providers.

The results are strongly evidenced with sequential growth in memory revenues to record levels and betting multiple expanded position in existing customers as well as adding new customers. These efforts are also evidenced by the yearly balanced customer mix that included two large memory customers and two large foundry customers, which contributed more than 10% each to the overall product revenue. Moreover, we're very encouraged by the sizable growth in both segments, where foundry contribution grew 35% and memory 62% from a year before.

As it results to our financial model, the strong yearly profit demonstrates once again the value offering it brings to the customers, the synergies we've built in our portfolio and operational efficiency we embedded into our financial model that we continue to grow. As a result, we reported this year, yearly profit with 76% growth in non-GAAP EPS. Despite the challenges we faced with the fast staging of the company, we continue to maintain our strict model which can accommodate elevated investment in R&D, while still meeting our long term profitability targets.

As part of our evolution into a bigger company, we're focused on changing the R&D spending to be divided by investments in sustaining innovation to our traditional portfolio and disruptive innovation to develop new products for ne emerging process control challenges which are not addressed currently. This strategy is already embedded in our product roll out where we have expedited our development cycle and could launch multiple new solutions through the year.

We should expect a similar price in the company years while we differentiate our offerings and expand our available market beyond the traditional Metrology steps. The solid performance of our product sales is also complimented by ongoing strength in our service business with a new yearly record hike of approximately 48 million, which reflects 50%. Our continuous investment in enhancing our installed base is bearing fruit with various solutions that enable enhancement activity, better utilization and improve Metrology capabilities in previous models.

As part of our growth, we're entering 2018 with a more balanced geographical mix of the world. While Korea continues its growth in revenue contribution, we run 27% from the overall revenue in 2017. In light of the increased investment in Nanjing, we're also experiencing the tremendous growth in spending in China, which now accounts for approximately 17% from the overall revenue in 2017. The investment in China, both by domestic and global players is rising significant growth in semiconductor CapEx and Nova is well positioned to benefit from this growth in 2018 as well.

As for our product portfolio, our growth as a high end technology company is driven by successful execution of a differentiated product strategy that our opinion is becoming more attractive as challenges are growing in the most complex next generation memory and logic devices. Our strategy to invest a large portion of our income back into R&D to create new organic engine is bearing fruit with a holistic approach with coupled hardware sensitivity with advanced software capabilities, which intersect customers' needs in the most complex step.

Entering 2018, we will continue investing in this direction to roll out new solutions and products to address an even wider range of applications and in return accelerate our growth in the new Metrology segment. The ability to create synergies between our technologies is expected to drive another growth year in 2018 for the both the X-ray and optical product line. Encouraged by our intensive growth in recent years we introduced at the beginning of 2018 new multiyear strategic plan to meet 300 million in revenues and further growth in profit.

While we continue to look for new acquisitions, we believe that meeting our new target can be achieved largely by investing in our own technology to drive faster organic growth. In order to meet this aggressive milestone, we're going to focus on leveraging our technology innovation to create a meaningful competitive edge, investing in customer partnership in early development stages and continuing to maintain our solid operational model.

In summary, our 2017 results can be attributed to the transition we made from being a CMP integrated Metrology company which was highly exposed to foundry customers to a multi-product, multi technology company with a broader customer base across all device segments. Based on our 2017 achievement and yearly record backlog, we expect another growth year in 2018 and see a clear path to meeting our long term strategic model.

Based on our current estimation for the overall industry demand, we believe that the industry momentum would continue in 2018, while the markets benefit from solid catalysts mainly in the world of data management and high power computing. In this environment where our customers' are going through continuous inflection points, Nova is well positioned to benefit from their needs, to fabricate better devices which also buy in through the market.

As for the first quarter of 2018 guidance, we expect the following; revenues in the range of 54 to 60 million, diluted EPS on a GAAP basis in the range of $0.29 to $0.40 per share and non-GAAP basis diluted EPS in the range of $0.34 to $0.45 per share.

Now let me hand over the call to Dror, to review our financial results in details. Dror?

[Dror David, Chief Financial Officer]

Thanks Eitan. Good day everyone. In my following prepared remarks, I will refer to both GAAP and non-GAAP results. You can find a detailed reconciliation between GAAP and non-GAAP results per item at the end of the earnings press release.

I'll start with over viewing 2017 fourth quarter and afterwards will review 2017 results on an annual basis. I'll then review the expected financial model of the company as part of the NOVA 300 strategic plan and will conclude my prepared remarks by providing more details regarding the guidance for the first quarter of 2018.

Total quarterly revenues in the fourth quarter of 2017 were $57.4 million, higher than the company guidance for the fourth quarter, reflecting 6% increase quarter-over-quarter and 14% increase year-over-year. Product revenues in the quarter were $44.8 million, of which 60% came from the foundry segment and 40% from the Memory segment.

During the quarter, the company had three customers that exceeded 10% of product revenues. Global Foundries accounted for 26% of product revenues; Samsung accounted for 22% of product revenues and Hynix accounted for 11% of product revenues.

As expected and as communicated in the previous quarterly results conference calls, blended gross margin decreased in the fourth quarter and came in at 66%. This reduction was attributed to lower service and software revenues and to the impact of the recently announced new product introduction which bear higher cost during the initial penetration phase.

Operating expenses came in higher than planned at approximately 19.7 million on a GAAP basis and $18.4 million on a non-GAAP basis. Most of the increase was due to higher R&D expenses as the company accelerated introduction and development of new products and the rest of the increase was in G&A expenses, which included higher consulting expenses some of which are onetime expenditures.

Tax expenses in the fourth quarter were higher than expected were impacted by several elements. The first element is the tax legislation change in the US, which reduced the company's profit tax rate to approximately 20% from approximately 35%. The implementation of this change during the fourth quarter of the year affected the differed tax assets balances at year end.

Additionally, tax legislation change in Israel reduces the Israeli based profit tax rate to approximately 13% from approximately 16%. Following a final analysis of these legislations the company implemented the relevant changes during the fourth quarter of the year.

The third and final element is a onetime tax provision of 3.5 million for years prior to 2017 and 20116, which was required following tax assessment discussion with the tax authorities regarding these prior years.

As a result of these changes and updates, the effective tax rates of the company on a GAAP basis came in at 37% and the effective tax rate on a non-GAAP basis, which excludes changes in the first tax assets and the mentioned tax provisions for prior years, came in at 11%.

GAAP net income in the quarter was 8.2 million or $0.29 per diluted share. Non-GAAP net income in the quarter was 13 million or $0.45 per diluted share, higher than the company guidance for the fourth quarter.

During the fourth quarter of the year, the company generated positive cash flow of $9.3 million from operating activities. In parallel, the company essentially completed most of its $3 million investment in expanding its manufacturing capacity for optical CD and ray.

I'll now move to review the annual results of the company for 2017. Total revenues in 2017 increased by 35% over 2016, this growth is approximately double compared to our peer group process control companies and reflects the market share gains of the company in 2017.

Product revenue distribution within 2017 was 65% from the foundry segment and 35% from the memory segment. Customers that accounted for more than 10% of product revenues on an annual basis were as follows.

Samsung was the company's largest customer in 2017 accounting for 27% of 2017 product revenues, relative to 12% in 2016. TSMC accounted for 23% of 2017 product revenues, relative 37% in 2016. Global Foundries accounted for 14% of 2017 product revenues, relative to less than 10% in 2016 and Hynix accounted for 10% of product revenues, unchanged from 2016.

Blended gross margin for the year was 59% on both GAAP and non-GAAP basis, reflecting 410 basis points improvement year-over-year on a non-GAAP basis. This increase in the annual blended gross margin was attributed mainly to a significant increase in software revenues which more than doubled in 2017 over 2016 and accounted for 10% of the company's product revenue.

Operating expenses in 2017 increased by approximately 13%. The combination of 35% increase in revenues, significant expansion in gross margins and well controlled operating expenses resulted in more than 50% of the incremental revenues in 2017 flowing into the operating profit.

On a percentage basis, the operating margins expanded in 2017 to 26% on a GAAP basis and 28% on a non-GAAP basis. The annual effective tax rate in 2017 came in at 23% on a GAAP basis and 15% on a non-GAAP basis.

GAAP net income for the year was 46.5 million or $1.63 per diluted share. Non-GAAP net income for the year was at record level of 55.4 million or $1.94 per diluted share. During the year, the company generated positive cash flow of 62 million from operating activities and concluded the year with 150 million in cash reserves.

In final, the company's day sales outstanding in 2017 were 69 days, within the company's target of 70 days and inventory turns were 2.8 times a year, higher than the company's target of 2.5 inventory turns per year.

As communicated during investor conferences, the company revised its target financial model as part of updating a strategic with $300 million in revenues organically. At $300 million revenue level, we expect gross margin to be between 56% and 59% and operating margins to be between 26% and 29%.

We've monitored closely industry trends and benchmarks and we believe that this model represents the right balance of competitive pricing of products, proper investment level in R&D and infrastructure to support continuous growth and a healthy profitability level which is higher than the benchmark for similar companies in our scale.

On the tax front, following the recent tax legislation changes, we expect the long term effective tax rate of the company to be approximately 18%. Regarding the company guidance for coming the quarter as Eitan mentioned, revenues in the first quarter of 2018 are expected to be between 54 million and 60 million.

At these revenue levels we expect the following; blended gross margin is expected to be approximately 56%, which still reflects lower than average software revenue. Operating expenses are expected to be similar to the previous quarter. Effective tax rate is expected to be approximately 19%.

With that I'll move the call back to Eitan.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you, Dror. We definitely will be pleased to take your questions.

[Operator]

[Operator Instructions] We shall now take our first question from Edwin Mok of Needham & Company. Please go ahead sir.

[Edwin Mok, Needham & Company]

We are mixed going into the first quarter and for this year if I remember you had reached strong growth in terms of '17, do you expect that mix to continue to increase in the coming year or do you expect it to be more balanced?

[Eitan Oppenhaim, President and Chief Executive Officer]

Edwin, I think we didn't hear the first part of your question, but, I think that you are asking about the mix between Memory and Foundry right?

[Edwin Mok, Needham & Company]

Yes, that's correct yes.

[Eitan Oppenhaim, President and Chief Executive Officer]

As I said, we think that the strength in Memory will continue in 2018, as part of the inroads and the evaluations that we are doing will materialize. We think that it will continue in several customers as well as in both segments in the Drone and vertical NAND. And, we believe it can even grow. Our long term target, we see that to be at around 40%, 45% Memory and around 60%, 65% Foundry, this is - sorry 65% to 60% Foundry. We think that in Foundry intensity is higher and therefore we believe that we need to be exposed largely to Foundry.

[Edwin Mok, Needham & Company]

Okay, great, that's helpful. And, then on the software side I remember middle of the year there was - I remember in 2017, you guys had three sizable upgrades, software upgrades for your customer because of the new software you guys rolled out, and that [indiscernible] more than doubled in 2017? And you just guided for 1Q software to remain light; do you think your software level is - do you think your software shelf can grow this year? And regarding the new machine learning software, can you explain what you guys are doing there and what is the attached rate and customer response after you launch the software?

[Eitan Oppenhaim, President and Chief Executive Officer]

I would like to divide the question to few levels. The first one is that we are encouraged from the results that we had in 2017 and we continue selling and continue delivering products according to our models. But saying that conservatively we would like to be in 10% out of the revenue coming from software, I think with the potential that we have, although we don't feel the end of the year, there is a potential to over achieve what we did in 2016. So, this is regarding the revenue.

Secondly regarding the attached rate, the thing that we need to divide between the regular software upgrade that we are doing to our system, that are not counted in this software revenue we are talking about. Most of the software revenue that we are talking about is the new modeling capabilities that are coming on top our fleet. And, the main target is to make sure that we are forcing fast end application mainly in the Optical side. As you know, physically, in order to measure it this in the semiconductor, you can't actually see what you measure, you need to modulate and interpret the spectrums that you extract from the measurement. This takes time, it always becomes a limitation in very a fast cycle and therefore, we looked for ways to shorten the time and shortened time coming from looking on a different angles on the way that we are doing models. So if - previously you need to do a full model, a full physical model that could even take three months, today we can use some mathematical algorithm engine that sits on top of the big data bases that we have, taking formation from various tools can be - metrology tools can be - other process control tools and can be even process tools.

And actually by getting large amount of information, we can type in the measurement and sometimes even almost predict the measurement. So, therefore the combination of physical model and mathematical model brings the model for us to sometimes to semi model or even sometimes without a model at all. And, this can be reflected in the times to solution that we bring to the table which is coming very close to other process control tools that we have in the field and actually we are moving the limitation of time to solution even in R&D or in a recycled changes in development of the structure.

The third element is what kind of software you were selling, so we sell this machine learning and of course this machine learning has a client based - sorry, service line basis on our install base and it's been sold according to the licenses that we sell to. And secondly there's all the big data base to collect all the information and manage the fleet, which is coming on either sub wide or node ways or it can be even done on a tool basis, so these are the three elements that's cover the software .

[Edwin Mok, Needham & Company]

Okay, great, that's extremely helpful. And, finally on the target model, obviously you guys raise your target model even on the revenue sides towards your margin. I want to understand, beyond, target success memory what's driving this increase, is it just increase in Metrology intensity, is it you are more confident about your ability to grow, success of new product and I think at our conference you guys talk about beyond 2020, you think and you eventually got 450,000 number, for the acquisition. Any color you can provide around those even longer term outlook or [indiscernible]?

[Eitan Oppenhaim, President and Chief Executive Officer]

Yeah, Edwin I'll talk from the fact that we didn't neglect the idea of doing M&A and continue to do further acquisition. I think that followed in 2017 and the very successful integration that we went with ReVera in the last two and a half years; we definitely are encouraged and would like to do other acquisitions as well. Naturally the market condition and the strength of their economy has been creating some moderate limitation to define the connectivity but still we are looking for target lift and we aggressively would like to extend our portfolio with other product and technology as well.

However, when we are looking on the successful growth in the last two to three years, we are also encouraged from the traction that our products are getting in the market. So if you are looking right now on the memory side, the growth actually came from introducing new models, introducing hardware and software coupled solution, introducing some disruptive innovation that could not source before by our competitors. And if you look right now on the market share - actually on our growth this year, on the 40% growth in our product, is definitely more than the overall process control growth. Overall, it's more than the optical metrology growth, so actually more than even the [indiscernible] equipment growth rates. So, we believe that most of this came from the market share.

When we are looking on the future, we don't count to be $300 million Company organically by just trusting the intensity. I think the intensity will grow obviously, but the major element for us being in 300 millions in couple of years is two things, one is continuously taking market share and establishing our leadership in Foundry. And second what I discussed about the technology. We truly believe that through our products we could differentiate our offering in the last two years, it will continue in 2018, where we continue to find a regular metrology fight, but we still bring new innovation to the field, with new application which are currently not sold. So the combination of new products, new innovation, new disruptive innovation together with the market share that we will take with our technology in existing market, give us the confidence that we can reach 300 million.

[Edwin Mok, Needham & Company]

Okay great, that's all I have thank you, appreciate it.

[Operator]

We shall now take our next question from Patrick Ho of Stifel Nicolaus. Please go ahead sir.

[Patrick Ho, Stifel Nicolaus]

Thank you very much and congrats on a nice quarter and the year. Eiten, may be first off, in terms of your efforts in expanding your memory customer base, I think obviously that's impressive and it brings you into the into the market segment which is showing a high level of growth. Can you discuss some of the applications and some of the manufacturing challenges your solutions are addressing, and I guess how that will continue to grow particularly as 3D NAND grows more layers and the Drone continues to shrink? What are some of the additional growth opportunities for Nova in these industry transitions?

[Eitan Oppenhaim, President and Chief Executive Officer]

So, Patrick, I'll look at that from the two technology product lines that we have. I'll start first from the dimensional part and the optical technology. I think that more the xenon structure is becoming more awaited into the high aspect ratio structures. And, as more they are adding layers and layers of memory, the parameters and the CD's that we need to solve through this towers of memory are becoming more and more challenging. You can imagine that if the customer is asking couple of CD's along with the profile of the high aspect ratio structure, it's becoming very, very complicated to do it with optical. And, we believe that we have some mechanism, to use the optical system that we have which at present a different technology than our competitors, we'll be able to solve part of the challenges that we see in the vertical NAND. Actually most of the market share that we took in vertical NAND came from disk capability.

Secondly in the vertical NAND, is built from benches of memory, so if we can solve the ability to measure CDs or non-structural device or non-applicable device which we can, actually give us the benefit to solve more application. So, this is regarding the vertical NAND and optical.

Secondly regarding Drone, Drone is a dimensional structure that keeps on scaling and shrinking and as in other devices once it shrinks and scales and goes to 3D dimensional structure the need for metrology is increasing and you need to measure more parameters as the design also increase.

So, this is regarding the Drone, and sorry in the VNAND.

Now, regarding the X-ray part or XPS part, what you are looking right now is specifically on VNAND and the combination of ON-ON or OP-OP, the demand for measuring very ultra thin layers as well as the composition and other characteristics of the materials are become very crucial, in stabilizing the overall structure. This is why we see in the memory customers, we see in 2017 it changed from taking tools to just interrupt tools, we're actually in inline tools, which doesn't measure only call wafers or monitor wafers, but measure actual reduction wafer. So this is increasing the attach rate and also increasing the market share in the memory. So overall the combination of dimensional end material in the memory beside intensity fills is increasing.

[Patrick Ho, Stifel Nicolaus]

Alright that's helpful. May be as a follow up question, I was just - in terms of your R&D investments that you've talked about, are they to introduce, I guess new hardware solutions, software and are they going to be I guess within your current scope of dimensional and X-ray or do you see yourselves expanding into potentially, new other metrology markets that are peripheral to what you already serve?

[Eitan Oppenhaim, President and Chief Executive Officer]

So, taking that into the next two years'18 and '19, we are definitely going to use our current technology, the dimensional and the material, the X-ray and the optical to come with new tools to the market. But, the new tools that we are going to the market are not necessarily choosing the traditional metrology application that's used to be sold in OCD before. Saying that, it means, the process control itself starting from testing, inspection and metrology has different application that we think that we can solve by our own optical and X-ray technology. On top of it nobody says that optical can be used only for dimensions and X-ray can be used only for materials. So, the combination of the two technologies can join together for some unique technology, that actually even serve some of the application that today customers required to break the way through in order to find out the ultimate profile, we find some ideas and ways to do it differently.

[Patrick Ho, Stifel Nicolaus]

Great, that's helpful. Thank you very much.

[Operator]

Yes, I think that the line is not open and - because I see that - I think there is a question.

[Eitan Oppenhaim, President and Chief Executive Officer]

Operator can you hear us?

[Operator]

Yes sir I can, I do apologize. We shall now take our next question from Mark Miller. Please go ahead sir.

[Mark Miller, Benchmark]

Congratulations on your record quarter and another record year. You're projecting growth again in 2018, I'm just wondering in terms of what are going to be the major drivers is it penetration of more Memory, is it the new products and also the growth in the China opportunity? I'm just wondering what are you - if you could rank those in terms of what are the greatest close drivers you expecting into 2018.

[Eitan Oppenhaim, President and Chief Executive Officer]

Yeah, thanks Mark. We have four elements or four growth engines, when you are looking on 2018. First is the keep - we are going to keep the momentum in growing our market share. This is the most crucial target for us in the next coming year and definitely memory is one of the main targets for us to increase the market share. Secondly, I think the territory mix, where China will continue grow its - the second element. We see continuous growth in the last two years and we think that this will continue growing substantially in 2018 as well.

The third one is the new growth engine that we bring to the market. So, if we could bring to the market last year four new types of products, which three out of them is hardware and one of them is software. We are going to stay on the same pace in 2018 as well and there is a lot of traction in the market before these tools are going outside to the market. And we believe that we can generate revenues from those tools as well in 2018. And the fourth growth engine, you know all the market is talking about, Memory and the growth about VNAND and Drone. But, we also look on this year as a growth year for our Foundry as well.

Although the Foundry is a bit nuisance, for the second half we still believe that the continuous investment in variety of technology modes starting from 2018 to 2022, expanding both in China as well as in Taiwan and in other places will continue and the fight for [indiscernible]] will continue as well in the advanced mode in the second half. So, we believe that the fourth growth engine for us should be the leadership or subsequent with the leadership in the Foundry. So, we believe that we can grow in Foundry as well. Those are the four growth engines that I can mention for 2018.

[Mark Miller, Benchmark]

Okay, thank you, I'm just wondering are you starting to see any replacement of some of your legacy tools, people upgrading to do models whether it's for better resolution of 3D devices through a new like source or detectors, are there upgrade opportunities on your existing tools, your legacy tools?

[Eitan Oppenhaim, President and Chief Executive Officer]

So it will reflect in our services revenue which reached record high this year and we definitely see a lot opportunities in upgrading the installed base. Actually more than the third out of the revenues are coming from utilizing our installed base in a different way, either by upgrading them to the most updated hardware or upgrade them with the new software or changing some of the parts, in order to utilize those tools better, so definitely there are lot of opportunities for us on these projects.

[Mark Miller, Benchmark]

Okay, just last question , little more color what's going on with the X-ray business for last quarter?

[Eitan Oppenhaim, President and Chief Executive Officer]

You are asking about specifically about the X-ray in the fourth quarter?

[Mark Miller, Benchmark]

Yes, yes.

[Eitan Oppenhaim, President and Chief Executive Officer]

So Mark, we don't break out the revenue from X-ray to the Optical or from dimensional to material. I can just refer to the overall year thing that both product lines grew significantly. And both of them presented record all time yearly revenues for both X-ray and Optical.

[Mark Miller, Benchmark]

Do you think X-ray will grow in 2018?

[Eitan Oppenhaim, President and Chief Executive Officer]

I said that X-ray will grow when we bought them and chosen to be a very nice growth rate. We truly believe that X-ray can keep on growing in 2018. Actually we mentioned that at the backlog that we have for 2018, actually the backlog that we came exiting 2017 is the highest that we ever had for all tools going forward to a new year. So we are definitely confident that those product lines are growing well and will continue to grow in 2018 as well.

[Mark Miller, Benchmark]

So, that was a record total backlog you ended 2017, is that correct?

[Eitan Oppenhaim, President and Chief Executive Officer]

Yes.

[Mark Miller, Benchmark]

Okay, thank you.

[Eitan Oppenhaim, President and Chief Executive Officer]

So Mark from '17 to '18 this the record back log that we ever had.

[Mark Miller, Benchmark]

Okay, thank you.

[Operator]

We shall now take our next question from David Wu of Indaba Global Research. Please go ahead sir.

[David Wu, Indaba Global Research]

Yes, I've got a question on your customer list in Memory, you've done a very good job in penetrating those Samsung and Hynix and I was wondering what is keeping you from achieving similar success at Toshiba and Micron?

[Eitan Oppenhaim, President and Chief Executive Officer]

So we didn't say we have an issue, we both customers, we just detailed the biggest customer that contributed more than 10% of our product revenues. Looking right now on the four of the six Memory customers we have present in all of them, I think the looking on the amount of spending this year in 2017 for both Hynix and Samsung they were actually higher than any other memory provider. And, therefore, I think their results are better. But definitely, no [indiscernible] position and growing position in all the memory customer.

[David Wu, Indaba Global Research]

Okay, the other question I asked follow up is TSMC; they've been digesting their spending from as of calendar '17 and I noticed that they pulled in their 60 nanometer FAB in Nanjing into the second quarter. I was wondering whether there is going to be a pickup in TSMC orders starting mid-year onwards from where you are sitting.

[Eitan Oppenhaim, President and Chief Executive Officer]

The way that we look on TSMC this year is going to be affected from three types of spending, okay. One type is the continuous expansion of the seven nanometers and seven plus which has multiple customers that are waiting for capacity and I think that they will increase the capacity along the year. The second one is the launch of a new 60 nanometer line in Nanjing, which will continue throughout 2018. And the third one is opening the 5 nanometer pilot line somewhere in Q3 or Q4, 2018. So definitely when you are looking on those potential opportunities they're most weighted towards the second half than the first one.

[David Wu, Indaba Global Research]

Yeah. Thank you

[Operator]

This concludes all the questions for today. I'd now like to hand the call back to Mr. Eitan Oppenhaim, for any closing remarks. Thank you, sir.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you, operator and thank you all for joining our call today. By that we conclude our fourth quarter and full year 2017 Earnings Conference Call. Thanks and good bye.